Yahoo's bold -- and expensive -- deal for Tumblr
Taking over the popular blogging platform is a smart idea, but with a price tag of $1.1 billion it's a huge gamble for CEO Marissa Mayer.
Yahoo (YHOO) CEO Marissa Mayer is making an enormously bold bet by buying the six-year-old social blogging company Tumblr for $1.1 billion, mostly in cash. Tumblr has sufficiently massive traffic to boost Yahoo's already huge global audience.
There's also the mobile aspect of Tumblr, which Mayer has repeatedly said is something Yahoo needs to focus on to compete in the future. And buying Tumblr helps address the issue of personalized content to help drive display revenue growth.
Considering the company only did $13 million in revenue last year, though, Mayer had better find a way to make the acquisition pay off or this could be her first major flub.
Mayer's strategy for rebuilding Yahoo began to reveal itself several weeks ago, when Yahoo announced its Summly acquisition. Mayer believes that content is king, and Tumblr had 117 million visitors in April, with more than 100 million blogs and at least 50 billion posts, according to comScore. Tumblr CEO David Karp has only recently begun to monetize his user base.
"The combination of more personalized content and increased product innovation will be key in getting us back to a path for display-revenue growth," Mayer said during Yahoo's fourth-quarter earnings. The CEO also added that Yahoo would have "some content costs, which you'll see as we make some of these developments."
Despite posting just $13 million in revenue last year, the New York-based Tumblr could do as much as $100 million a year in sales in 2013, according to AllThingsD, which which first broke the acquisition news.
Going from $13 million a year to $100 million, or a number close to that, would be incredible and might be enough to warrant Yahoo's decision to spend $1.1 billion in cash. The problem is that $100 million is still small potatoes to Yahoo, which did $1.14 billion in revenue last quarter. The issue for Yahoo! over the past few years has never been about its user base (some 700 million monthly users to various properties), it's been about making money off those users. Tumblr addresses expanding the user base, but -- given its core demographic -- it's tough to say when Yahoo will see a return on its $1.1 billion investment.
Yahoo's share price has jumped 33.3% year to date and around 70% since Mayer took over as chief executive, in July 2012, with the bulk of those market gains due to increased valuations of its Asian assets, Alibaba and Yahoo! Japan. The share-price bump buys Mayer time to figure out how to best utilize Tumblr. But the task is not going to be easy.
On Mayer's Tumblr, she promised "not to screw it up."
"Tumblr is incredibly special and has a great thing going," Mayer wrote. "We will operate Tumblr independently. David Karp will remain CEO. The product roadmap, their team, their wit and irreverence will all remain the same as will their mission to empower creators to make their best work and get it in front of the audience they deserve. Yahoo! will help Tumblr get even better, faster."
I recently suggested three places for Mayer to consider spending Yahoo!'s cash, including Zynga (ZNGA), Yelp (YELP) and Pinterest. Those companies are poised to produce significantly more in annual revenue than Tumblr, though all three combined would've come at a higher cost than the $1.1 billion deal for Tumblr.
Yahoo is chasing a younger audience here, the 18-34 age group that primarily uses Tumblr. Now it's up to Mayer and Karp and their respective teams to figure out how to best monetize Tumblr's vast user base.
More from TheStreet.com
Copyright © 2014 Microsoft. All rights reserved.
Start investing in technology companies with help from financial writers and experts who know the industry best. Learn what to look for in a technology company to make the right investment decisions.
In an interview, the CEO says the company is taking the time to get them right. 'Our objective has never been to be first. It's to be the best.'
VIDEO ON MSN MONEY
MUST-SEE ON MSN
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'